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The Inevitable Linkage Discussion

Let’s face: it is almost the end of 2014 and we are still negotiating an international agreement to mitigate climate change for after 2020. The good news is that several countries have taken the initiative, and adopted climate change policies. These policies vary from emissions trading, carbon taxes, performance standards, among others. But what role will these regional, national, or sub-national policies play under the new international agreement? Yesterday, the International Emissions Trading Association (EITA) held a side event to address this question. The discussion, “Linkage Among Climate Policies in the 2015 Paris Agreement”, had as panelists leader researches on the topic: Robin Stavins, from Harvard University; Daniel Bodansky, from Arizona State University; and Dirk Forrister, from EITA, among others. The discussion was based on the latest report from the Harvard Project on Climate Agreements, “Facilitating Linkage of Heterogeneous Regional, National, and Sub-National Climate Policies Through a Future International Agreement” (November, 2014).

The concept of linkage is fairly simple; it refers to the idea that distinct carbon pricing instruments can be linked together to meet the general goal of reducing greenhouse gas emissions. The linkage can occur is two ways: direct and indirect. The direct linkage occurs when two different schemes mutually accept the emission reduction units from one another to meet their goals. The indirect linkage occurs when two programs, for example cap-and-trade schemes, do not allow the trade of allowances between their programs, but both are direct linked to a third, common trading scheme.

As wisely explained by Daniel Bodansky, to address this issue the new international agreement can follow three distinct approaches. The first is to expressly forbid any linkage between different carbon pricing schemes. The second approach is to be silent about the issue, and the third, preferable approach is to allow linkage between different carbon pricing schemes. Allowing linkage would provide a number of benefits to participating countries, including: cost savings; improvement of individual market, through the decrease of market power and price volatility; and equity distribution. Another main interesting point is that, as Robert Stavins (left) pointed out, allowing the linkage between different schemes can potentially increase overall national emission reduction ambitions, as more market options are made available.

To allow linkage between different climate policies, all panelist agreed that the new agreement shall include a paragraph as simple as possible. As proposed by the panelists, the paragraph shall be limited to expressly allow linkage, define key terms, and provide basic guidance regarding tracking emissions to ensure the environmental integrity. In their opinion, further detailed rules shall be decided by future meetings of the Conference of the Parties.

While challenging, linkage is already happening in different levels. In fact, the issue is very similar to the decision, in 1997, to allow the co-existence of emissions trading, joint implementation, and clean development mechanisms under the Kyoto Protocol. Countries are also already dealing with this issue in the national, or sub-national level. California and Quebec Emission Trading Schemes, for instance, are linked since 2013. The same is true for the European Union and Norway Emission Trading Schemes, that signed their linkage agreement back in 2007. Other linkage agreements are expected to happen as the number of cap-and-trade programs increase; up to date there are 20 regional, national, or sub-national trading schemes in operation or scheduled to enter into operation. The linkage issue will not go away, and several examples and options have already been deeply discussed. The remaining question is if the Paris agreement will take the necessary step and deal with this issue, or if the new agreement will be silent.